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Despite posting some strong earnings, the market for HOCHTIEF Aktiengesellschaft's (ETR:HOT) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.
View our latest analysis for HOCHTIEF
Zooming In On HOCHTIEF's Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company's profit exceeds its FCF.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
HOCHTIEF has an accrual ratio of -0.66 for the year to December 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of €1.7b in the last year, which was a lot more than its statutory profit of €775.6m. HOCHTIEF's free cash flow improved over the last year, which is generally good to see. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
The Impact Of Unusual Items On Profit
Surprisingly, given HOCHTIEF's accrual ratio implied strong cash conversion, its paper profit was actually boosted by €568m in unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. HOCHTIEF had a rather significant contribution from unusual items relative to its profit to December 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.
Our Take On HOCHTIEF's Profit Performance
HOCHTIEF's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, it's hard to tell if HOCHTIEF's profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into HOCHTIEF, you'd also look into what risks it is currently facing. To that end, you should learn about the 4 warning signs we've spotted with HOCHTIEF (including 2 which are significant).